A decision aid in warehouse site selection

international journal of

production economics

ELSEVIER Int. J. Production Economics 45 (1996) 169-180

A decision aid in warehouse site selection

Jukka Korpelaa3 *, Markku Tuominenb

“Kymmene Corporation, 53200 Lappeenranta, Finland

bLappeenranta University of Technology, P.O. Box 20, 53851 Lappeenranta, Finland

Abstract

The strategic importance of logistics is steadily increasing and companies need effective logistics support to achieve competitive advantage. Warehousing strategy is an essential element of the overall distribution logistics strategy and especially the decision of selecting optimal sites for warehouses has significant effects on customer service and logistic costs. The warehouse site selection is a complex process where multiple, both tangible and intangible, criteria need to be considered. However, many of the present methods supporting the process remain cost-oriented. In the paper, we present an integrated approach to the site selection process where both qualitative and quantitative aspects can be taken into account by using an analytic hierarchy process-based decision aid.

Keywords: Warehousing strategy; Decision support systems; Analytic hierarchy process

1. Introduction

According to Bowersox and Daugherty Cl], escalating competitive pressures and increased performance requirements have resulted in greater recognition of the importance of logistics activities. Companies need logistics support to achieve competitive advantage and to forge sustainable customer relations. The value-added contribution of logistics to integrating business functions has been acknowledged regardless of the basic competitive strategy of companies [2]. According to Fuller et al. [3], logistics has the potential to become the next governing element of strategy as an inventive way of creating value for customers, a source

* Corresponding author. Tel.: 358400 556391; fax: 358 53

514623.

of savings, an important discipline on marketing, and a critical extension of production flexibility.

Logistics as a holistic approach to the management of material and information flows has an important role in satisfying the customers’ needs and requirements and logistics is considered a competitive resource. Value-added logistics means that traditional services, products, and new capabilities are bundled into new configurations in order to offer greater value to the customers, and to decrease the need to compete on price alone [4].

Defining distribution strategy is a process during which strategic operating alternatives are evaluated to determine the most cost-effective way of provid- ing the required customer service level. Warehous- ing strategy is an important part of distribution strategy and it consists of e.g. the following decisions: (1) should warehousing facilities be owned, leased or rented, (2) what is the optimal size and

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170 J. Korpela, M. Tuominenllnt. J. Production Economics 45 (1996) 169-180

number of warehouses, and (3) what are the optimal locations for warehouses [S]. The warehouse site selection decision has a significant effect on the types of transportation, the markets to be served, and the service level that can be provided to the customers [6]. However, warehouse site selection is a complex process involving multiple, both qualitative and quantitative, criteria. Furthermore, significant changes in the operating environment add to the complexity of the decision process. These changes include demand for flexible services integrated with the customers’ logistics systems, realisa- tion of demand/performance interactions, reduction of reaction and response times, and increased re- plenishment cycle lead times due to globalized sourcing channels [7].

In Section 2 of this paper, we review the role of warehouse site selection in distribution strategy, discuss recent developments in warehousing strategy, and explore different methods used for warehouse site selection. In section 3, we present an analytic hierarchy process-based decision support system for the site selection process.

2. The warehouse site selection process

According to Magee et al. [S], the highest level in According to Stock and Lambert [12], com-

the hierarchy of logistics problems is called flows panies can pursue a product warehouse strategy,

and facilities. The fundamental decisions forming a market area warehouse strategy, or a general

the basics of logistics system design are the number of facilities, their location, and the assignment of products to facilities and markets. Ballou [9] defines the key decision areas in logistics system design as (1) inventory policy, (2) facility location, and (3) transport selection/routing (Fig. 1). The location of stocking points creates an outline for the distribution logistics strategy as the number, size and location, and assigning market demand to them define the paths by which products are trans- ferred to the marketplace.

Warehouses are a part of an overall effort to gain place and time utility. The basic requirement for a warehouse to exist in a company’s logistical system is that it can provide cost or service advantages [lo]. The main functions for warehouses in a logistical system are (1) holding stocks generated by the imbalance between supply and demand, (2) consolidating shipments from multiple sources into a single shipment to the final destination, (3) break- ing volume-shipping quantities into the smaller quantities requested by customers and transload- ing large-volume shipments, and (4) mixing products according to customer orders [l 11. Owning warehouse facilities is not the only option for or- ganisations in need of storage space as warehouses can also be leased or rented.

LOGISTICS SYSTEM DESIGN

INVENTORY POLICY

What turnover ratio to maintain ?

Which products should be maintained at which stocking

points ? What level of product availability

should be maintained in inventory ?

Which method of inventory control is best ?

Should push or pull strategies be used ?

FACILITY LOCATION

What is best number, location and size of stocking points?

Which plants/vendors should serve which stocking points?

Which products should be shipped direct from plants/ vendors and which through the wareboushtg system ?

TRANSPORT SELECTION/ROUTING

Which customers should be served out of which

stoching points ? Which vehicle types should be

assigned to which customers ?

Which modes of transportation should be used ?

Fig. 1. The key areas in logistics system design [7].

J. Korpela, M. Tuominen/lnt. J. Production Economics 45 (1996) 169-180 171

purpose warehouse strategy in locating facilities.

The product warehouse strategy means that a company places only one product or product grouping in a warehouse. Thus, the product warehouse strategy is especially useful for companies with only a few products or product groupings that have a high turnover rate. Under market area warehouse strategy, full-line warehouses are located in specific spots in market areas and customer orders can be satisfied from a single warehouse. The general purpose warehouse strategy differs from the market area warehouse strategy only in that all markets within a geographical market are served from each

warehouse. Closs and Thompson [7] present three generalis-

ations concerning the management of physical

assets in a logistical system. First, there has been a trend toward standardisation of facilities and links to structure the distribution channel which results in the lack of consideration of the specific requirements for individual products and markets. Second, cost has been emphasised as the decisive performance variable. However, service characteristics should also be considered and the focus should be put on the overall performance instead of operating and capital costs. Third, the analysis of

the logistics system is often based on simplifying assumptions, such as (1) all warehouses and suppliers can perform the same operations with the same level of effectiveness, (2) demand level and characteristics are fixed and not affected by the actions taken by the company, and (3) decisions relating to logistics infrastructure are made without taking into account the relationship between the infrastructure and sales level. The evolution of logistics infrastructure management towards a total performance focus with the emphasis on satisfying customers’ needs no matter the cost is illustrated in Fig. 2.

The phases of the warehouse site selection

process have been described e.g. by Stock and Lambert [S]. The warehouse site selection decision is a process during which multiple criteria must be considered [12]. Cooper [13] identifies the following factors to be taken into account: the total costs of the distribution system, market orientation, production operation, the nature of the product, communications, financial considerations, the type of warehouse, and local considerations. In the case of selecting a site for a company-owned warehouse, the factors to be considered include e.g. the quality and variety of transportation carriers

MEASUREMENT FOCUS

DlsTANc!E

Fig. 2. The stages of evolution in logistics infrastructure management [S].


serving the site, quality and quantity of available labour, labour rates, cost and quality of indus- trial land, potential for expansion, tax structure, costs of construction, and cost of utilities [S]. If a company uses public warehousing, factors such as facility’s characteristics, availability of computer services, and other companies using the facility should be included in the site selection process.

Despite the fact that service aspects gain more importance, many of the present methods supporting the warehouse site selection process remain

cost-oriented. According to Schary [6], customer service is usually specified in terms of delivery time and it is included in the methods only as a con- straint e.g. limiting the potential locations to facilities within a maximum allowable delivery time. Schary divides computer-based models used for site selection into two main categories, simulation and programming. Simulation is a mathematical, detailed description of a system, whereas by using programming a previously formulated structure is imposed on a certain problem. Simulation models can be divided into deterministic models where variables are known with certainty and stochastic models in which probability distributions are incorporated. The programming methods include linear programming, mixed-integer linear programming by which multiple problems can be solved in a joint solution, and dynamic programming where an optimal path through location decisions at suc- cessive time periods can be determined. Stock and Lambert [S] divide the computer-based models into four main categories: planar models, warehousing models, network models, and discrete or mixed-integer programming models. Planar models are optimisation models by which the best locations for the warehouses can be identified. Warehousing models can be divided into external location models, where the location of the warehouses is examined, and internal location models, where the location of items within the warehouses is defined. In network models, the potential locations for the warehouses must be on or near a transport network. Discrete models are realistic and complex models where fixed and variable costs are included but which have large data requirements.

3. An integrated approach to the warehouse site selection process

The analytic hierarchy process (AHP) is a theory of measurement for dealing with quantifiable and intangible criteria that have been applied to numer- ous areas, such as decision theory and conflict res- olution [ 141. AHP is a problem-solving framework and a systematic procedure for representing the

elements of any problem [ 151. AHP is based on the following three principles: decomposition, com- parative judgements, and the synthesis of priorities. AHP starts by decomposing a complex, multicri- teria problem into a hierarchy where each level

consists of a few manageable elements which are then decomposed into another set of elements [16]. The second step is to use a measurement methodo- logy to establish priorities among the elements within each level of the hierarchy. The third step in using AHP is to synthesise the priorities of the elements to establish the overall priorities for the decision alternatives. AHP differs from conven- tional decision analysis methodologies by not re- quiring decision makers to make numerical guesses as subjective judgements are easily included in the process and the judgements can be made entirely in a verbal mode [17].

According to Saaty [lS], the AHP forms a systematic framework for group interaction and group decision making. Dyer and Forman [19] describe the advantages of AHP in a group setting as fol- lows: (1) both tangibles and intangibles, individual values and shared values can be included in an AHP-based group decision process, (2) with AHP, the discussion in a group can be focused on objectives rather than on alternatives, (3) with AHP, the discussion can be structured so that every factor relevant to the decision is considered in turn, and (4) in a structured analysis, the discussion continues until all relevant information from each individual member in the group has been considered and a consensus choice of the decision alternative is achieved. A detailed discussion on conducting AHP-based group decision making sessions including sugges- tions for assembling the group, constructing the hierarchy, getting the group to agree, inequalities of power, concealed or distorted preferences, and im- plementing the results can be found in [20,18].

J. Korpela, hf. Tuominen/lnt. J. Production Economics 45 (1996) 169-180 173

Using AHP, we develop a decision support system for warehouse site selection. The AHP-supported warehouse site selection process is presented in Fig. 3. For previous work on using AHP for the facility location problem, see e.g. [Zl].

The warehouse site selection process is divided into four main phases as shown in Fig. 3. The aim of the first phase is to define the problem and to set the goals for the decision process. In the second phase, the potential warehouse sites are defined and the information needed to evaluate the alternatives

is gathered. During the third phase of the process, the alternative warehouse sites are analysed and ranked. The analysis is divided into two phases: (1)

in the AHP-supported qualitative analysis, the

alternatives are compared based on intangible criteria, such as customer service aspects, and (2) in the cost analysis, the impact of each alternative on the total logistics costs is evaluated. During the last phase of the decision process, the outcomes of the qualitative and cost analyses are combined in order to calculate benefit/cost-ratios for each alternative. The choice of the warehouse site to be used can thus be based on the overall service/cost-effectiveness of each alternative, which is a significant improvement over the present mostly cost-oriented methods reviewed in section 2. The use of the presented approach to the warehouse site selection is demon- strated with a practical example by using an example

company (corporation A) as an illustrative case.

DEFINING THE PROBLEM: - defining the goals for the

decision process

DEFIN ING THE ALTERNATIVES: - defining the potential warehouses

- gathering the needed information about their service and cost characteristics

QUALITATIVE ANALYSIS: - defining the criteria

- structuring an AHP hierarchy - assigning priorities to the

elements in the AHP hierarchy - comparing and analyzing

the alternative warehouses with AHP - analyzing the stability of the obtained

decision with sensitivity analyses

COST ANALYSIS: - calculating the total logistics costs

if a certain warehouse site is selected - methods for the cost analysis include

linear programming, mixed integer programming, simulation etc.

/

CHOOSING THE BEST ALTERNATIVE: -calculating benefttkost ratios for

the alternative warehouse sites - choosing the best alternative

Fig. 3. The AHP-supported warehouse site selection process.

174 .I Korpela, M. Tuominenllnt. J. Production Economics 45 (1996) 169-180

3.1. Dejining the problem and the alternatioes

Corporation A is involved in a processing indus- try. Most of the corporation’s products are ex- ported and logistics is a key competitive factor in the business. The corporation has recently entered a new market area C which has been served by a warehouse located in another market area. How- ever, the corporation has set highly challenging objectives for increasing the sales volume in the market area in question. The logistics executives now face the question of where to locate a warehouse dedicated to serving the customers in the market area C. The policy of the corporation is to outsource warehousing services, thus avoiding in- vestments on own facilities. Based on a preliminary analysis, the logistics executives have defined three possible locations for the warehouse and the corresponding suppliers of warehousing services (Wl, W2 and W3) that satisfy the basic requirements set for customer service and cost level.

3.2. The qualitative analysis

The first step in the AHP-supported qualitative analysis is to identify the criteria on which the evaluation of the alternative warehouses is based. Because the role of warehousing as a part of logistics is to support a company to achieve its overall goals, the logistics executives must first identify the corporate level objectives to be considered in the warehouse site selection process. The corporate objectives with an impact on warehousing are: (1) corporation A intends to increase the present market share significantly in the market area C and to become the second largest in the market, (2) corporation A intends to create a major competitive advantage by differentiating its products with better customer service than the competitors are able to offer, and (3) corporation A aims to increase the cost- and service-effectiveness of its total logistical chain by applying process thinking and empha- sising synergetic co-operation between the elements of the value chain.

After consulting the sales and marketing executives as well as some main customers, the logistics executives define reliability as one of the key

criteria to be included in the warehouse site selection process. Compliance to instructions given by the corporate logistics personnel or the customers of corporation A is one of the main aspects of reliability. The accuracy of inventory management and reports has a significant effect on the management of corporate logistics and it also reveals the capabilities of the information systems used in a certain warehouse. The availability and reliability of transportation services is an important factor to be considered in the warehouse site selection process. The other elements of reliability are the condi- tion of the physical facilities and the equipment, the skills of the personnel, and damage-free handling of

the products in warehouse operations. The second group of criteria identified by the

logistics executives is flexibility. The components of flexibility include the ability of a certain warehouse operator to fulfil any special requests by the corporation or the customers, the ability to respond to urgent needs to receive or deliver products, and the availability of both warehousing and transportation capacity to respond to possible significant changes in the shipping volume.

The final criteria to be considered in the warehouse site selection process are related to the strategic compatibility of a certain warehouse which refers to the possibility of establishing a synergetic relationship between corporation A and a warehouse operator. The elements of strategic compatibility are the following: (1) the possibility of forming a long-term strategic alliance with a warehouse operator, (2) the strategic “fit” of a warehouse operator to the infrastructure, organisation, culture, and image of corporation A (potential information system links, the image, financial viability, relationships with other companies, etc.), and (3) the willingness of a warehouse operator to develop close co-operation in the planning and develop- ment of the operations.

After identifying the relevant factors to be considered in the qualitative analysis of the potential warehouse operators, an AHP-hierarchy is structured to represent the relationships between the elements. The hierarchy is shown in Fig. 4.

The overall goal for the analysis is located on the highest level of the hierarchy with the corporate level objectives on the second level. The main

J. Korpela. M. TuominenJInt. J. Production Economics 45 (1996) 169-180 175

GOAL SELECT THE BEST WAREHOUSE OPERATOR

I I

I I

1 CRfTERIA BELLdBILlTY FLEXIBILITY STRATEGIC

COMPATIBILITY

SUB-CRITERL4

ALTERNATIYES

FACILITIES/ EQUIPMENT I

SKILLS OF PERSONNEL I

-(=I 4 STRATEGIC

FIT

CO-OPERATION

I

w3

Fig. 4. The AHP-hierarchy for the qualitative analysis of the potential warehouse operators.

criteria are linked to the corporate level objectives. Each of the main criteria is divided into sub-criteria on which the actual analysis of the potential ware-

house operators is based. The alternative warehouse operators to be analysed are located on the lowest level of the hierarchy. The constructed hierarchy forms a logical representation of the complex, multiple-criteria decision process and it effectively describes the relationships between the elements involved. The hierarchy fosters under- standing and consensus among the decision makers about the decision process they are facing.

The next step in the qualitative analysis is to assign priorities for each element in the hierarchy. The priorities are set by comparing each set of elements in a pairwise fashion with respect to each

of the elements in a higher stratum [16]. A verbal or a corresponding nine-point numerical scale can be used for the comparisons which can be based on objective, quantitative data or subjective, qualitative judgements. In a group setting, there are sev- eral ways of including the views and judgements of each person in the priority setting process. In our example, the logistics executives make decisions in a common objectives context where all members of the group have the same objectives [19]. In a common objectives context, there are four ways that can be used for setting the priorities: (1) consensus, (2) vote or compromise, (3) geometric mean of the individuals’ judgements, and (4) separate models or players. The primary method used in the presented example is to try to achieve consensus

176 J. Korpela, M. Tuominen/Int. J. Production Economics 45 (1996) 169-180

based on extensive debate and discussion. How- ever, if consensus cannot be established, the geometric mean of the group members’ judgements is used as it is the uniquely appropriate rule for com- bining judgements since it preserves the reciprocal property of the judgement matrix [22] (see [19]).

With the hierarchy illustrated in Fig. 4, the priority setting procedure is started by comparing the corporate level objectives in a pairwise fashion with respect to the goal (what is the importance of each corporate level objective). Then the importance of the main criteria is evaluated with regard to each corporate level objective and the importance of each sub-criterion is assessed with regard to the main criterion they are linked to. The last step in the priority setting procedure is to compare the alternative warehouse operators in a pairwise fashion with respect to each sub-criterion (what is the preference of each alternative).

With the help of the corporate and marketing executives, the logistics executives evaluate the aim to increase the market share to be the most important corporate level objective with the priority of 0.413. The differentiation of the product by su- perior customer service is the second most important corporate objective with a priority of 0.327 while the importance of increasing the effectiveness of the logistics process is 0.260. The priorities of the main criteria are illustrated in Fig. 5.

With regard to increasing the market share, the reliability of warehousing operations is evaluated to be of the highest importance. For differentiation purposes, the flexibility aspects are assessed to be the most important. The criteria related to the strategic compatibility have a significant impact on the corporate objective to increase the effectiveness of the logistics chain. Overall, the reliability factors have the highest priority. The

overall importance of the sub-criteria is presented in Fig. 6.

The compliance to the instructions is the most important sub-criterion with the overall priority of 0.132. The high importance of the available capacity is based on the expectations of rapid increase in the sales volume. The high priority of establishing a strategic alliance with a warehouse operator re- flects the corporate policy to seek long-term com- mitment in its relationships with third-party service providers. The surprisingly low importance of the availability of transportation services can be inter- preted as a sign that transportation is not a significant problem at any of the potential warehouse locations.

The overall priorities of the potential warehouse operators and their performance with respect to each main criterion are shown in Fig. 7. The y-axis on the left side represents the importance of the main criteria and the y-axis on the right side the overall priorities of the alternative warehouse

M T

A

I ..:. RELIABILITY 10.7

N ,%I

C

R

I FLEXIBILITY

T

E

R STRATEGIC

I COMPATIBILITY 0 N 1.

0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0

IMPORTANCE (%)

q LOGISTICS PROCESS q DIFFERENTIATION MIDMARKET SHARE

Fig. 5. The importance of the main criteria

J Korpela, A4 Tuominen Jht. J. Production Economics 45 (1996) 169-180 177

COMPLIANCE

STRATEGIC ALLIANCE s

u

B

SPECIAL REQUESTS C

R CGOPERATlON I

T

E

R STRATEGIC FIT ‘1’ ::. T y: .:j; ,” :,l,‘I’:j~‘j:‘:‘ll:::“::, .:.I, x: ‘:I 7,3

I 0 ~~S~ORTAT~ON

N

DAMAGE-FREEHWDL. 1’:. ; . . ;’ .““:‘, ‘,,: j.j, :’ 4,4

FACILITIES/EQ~PMENT :::' ":" "" ."';I J,O .:

SKILLS OF PERSONNEL

0.0 2,o 490 60 S,O 10.0 12,0 14.0

IMPORTANCE(%)

Fig. 6. The importance of the main criteria.

.YO

.BO

.70

.bO

.50

Critx PERFORNCUlCE UITH RESPECT

c TO Go(IL FOR HODES BELOW: GORL Altx

.M RELIRBTY

I

FLEXIBTY SIR. CYJMP ow

I I

---Criteria---

.50

1 .40

F .lO

=--I -0° - Wl ., ., . w(2 . . . . . . . . . . w3 I

Fig. 7. The overall priorities of the alternative warehouse operators.

operators. Based on the analysis, the warehouse W3 is the best choice overall with the priority of 0.366. However, the overall performance of the warehouse Wl is very close (0.353) and, further-

more, Wl is the most effective alternative with respect to reliability. The overall performance of the alternative W2 is significantly worse (0.282) than that of the other two alternatives.


Using AHP to support the qualitative analysis, the logistics executives have established priorities for each alternative warehouse operator to represent their overall performance with regard to multiple intangible criteria. The method has enabled the logistics management team to identify the relevant qualitative criteria, to structure the problem in the form of a hierarchy, to assess the importance

of the criteria, and to evaluate the performance of the alternative warehouse operators with regard to each criterion.

3.3. The cost analysis

According to Stock and Lambert [S], total cost analysis is the foundation of the integrated logistics management. The objective of the total cost analysis is to minimise the cost of transportation, warehousing, inventory, order processing and information systems, and lot quantity cost, while achieving the requested customer service level. In the warehouse site selection process, the purpose of the cost analysis is to examine the effect of each alternative warehouse on the total logistics costs of a company.

Corporation A uses a transshipment model which is a specific application of linear programming to analyse the occurring costs if a certain warehouse is selected. The factories of corporation A are sources, customers have demands, and the certain warehouse under study is a transshipment point [6]. The objective is to allocate and route products from the factories through the warehouse to the customers in order to minimise the cost of all shipments within the logistical system. All available and feasible transportation routes and their costs are included in the analysis as well as the linear

Table 2

The benefit/cost-ratios of the alternative warehouses

costs of warehousing. The non-linear costs of each alternative warehouse can also be included. The outcome of the cost analysis is illustrated in Table 1.

Based on the cost analysis, the warehouse alternative W2 is the best alternative as the total logistics costs are 2.249 million units. W3 is clearly the most expensive alternative but the cost level achiev-

able by using the alternative Wl is very competitive with the alternative W2.

3.4. Choosing the best alternative

In order to select the most cost/service-effective warehouse location and warehouse operator for corporation A, the outcomes of the qualitative analysis and the cost analysis are combined by calculating the benefit/cost-ratio for each alternative. The results of the final phase of the warehouse site selection process are presented in Table 2.

Although the alternative W3 had the highest overall priority in the qualitative analysis, its impact on the total logistic costs is so high that the overall rank for W3 is only second. The cost-effectiveness of the warehouse W2 was not enough to compensate for the poor performance in the qualitative analysis and thus the benefit/cost-ratio of W2

Table 1

The cost impact of the alternative warehouses

Warehouse alternative Total logistical costs

(USD million)

Wl 2.367

w2 2.249

w3 2.638

Warehouse

alternative

Qualitative analysis

(priority)

Cost analysis

(USD million)

Benefit/cost-ratio Rank

Wl 0.353 2.367 0.1534 1

w2 0.282 2.249 0.1254 3 w3 0.366 2.638 0.1387 2

J. Korpela, A4. Tuominenllnt. J. Production Economics 45 (1996) 169-180 179

I c 0,1000 -- 0

s 0.0800 . . T

0,060O . .

R A

0.0400 --

T I 0.0200 --

0 0.0000 * I

0,000 10 1,000

THE OVERALL IMPORTANCE OF RELIABILITY

Fig. 8. A sensitivity analysis of the benefit/cost-ratio with respect to the overall importance of reliability.

is the lowest of the examined warehouse operators. Wl was the second best performer in both the qualitative analysis and the cost analysis which results in the best benefit/cost-ratio. Thus, the warehouse operator Wl is the recommended choice for the warehouse operator in the market area C for corporation A. Sensitivity analyses can be used to examine the effects of changes in the priorities of the criteria in the qualitative analysis on the benefit/cost-ratios of the alternative warehouse operators. The sensitivity of the outcome of the analysis with respect to changes in the overall importance of the criterion reliability is presented in Fig. 8.

In Fig. 8, the point IO marks the original overall importance of reliability. Based on the figure, it can be seen that the higher the importance of reliability, the higher the benefit/cost-ratio of the warehouse alternative Wl. Correspondingly, the benefit/cost- ratio of W3 decreases if more emphasis is put on reliability. As a conclusion, the choice of the warehouse operator Wl is further justified by the sensitivity analysis.

4. Conclusions

The proposed approach forms a flexible and systematic framework for the warehouse site selection

process. First, the proposed approach is a significant improvement compared to the traditional cost-oriented methods used for warehouse site selection as the analytic hierarchy process-based qualitative analysis of the potential warehouse operators makes it possible to include multiple intangible criteria in the site selection process. Second, the factors relevant to the warehouse site selection process can be presented in the form of a hierarchy describing the relationships between them. In the presented example, the actual criteria used in the evaluation of the alternative warehouses were linked to the corporate level objectives, thus ensuring the compatibility of logistics decisions with corpo-

rate strategy. Third, warehouse site selection is often a collective effort by a group of executives, and

the proposed approach helps to conduct a group session in a systematic and analytical manner, ad- dressing every key factor of the selection process in turn. Furthermore, qualitative and subjective judgements by multiple persons, such as customers, marketing personnel and logistics personnel, can be included in the priority setting process. Fourth, the presented approach enables the decision makers to approach the warehouse site selection process in an iterative manner as the hierarchy and the priorities of the elements can easily be modified. Sensitivity analyses can be used to examine the outcome of the

180 J. Korpela, M. Tuominen Jht. J. Production Economics 45 (1996) 169-180

decision process in further detail. Fifth, by using the presented approach, the qualitative analysis can be documented in detail and communicated to the interest groups.

The proposed approach to the warehouse site selection process enables decision makers to base the final choice on the overall cost/service-effectiveness of the potential warehouses. In the paper, we have presented an example where public warehousing was used but the presented framework is applicable to cases with company-owned facilities as well by adjusting the structure of the AHP-hierarchy.

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